1. Field of the Invention
This invention relates generally to electronic securities trading. More particularly, the invention relates to systems, methods, and computer program products for optimizing securities trading strategies using, inter alia, estimated transaction costs and market data (both historical and real-time).
2. Background of the Related Art
In electronic trading, securities portfolio transactions typically incur transaction costs, and the minimization of these costs has been a long-standing aim of securities traders. Transaction costs may be large, especially when compared to gross returns, and thus, might substantially reduce or even eliminate the notional returns of a particular investment. Thus, there is a need to develop optimal trading strategies that minimize trading costs and/or some other objective criterion.
To this end, statistical and mathematical forecasting models have been developed in an attempt to estimate the transaction costs of a proposed trade prior to its execution. Such models typically build upon known empirical facts about trading costs. For example, empirical studies have established that costs increase with trade difficulty, a factor systematically related to order size (relative to average trading volumes), trade direction (BUYS vs. SELLS), firm size (Market Capitalization), risk (e.g., the volatility of security returns), liquidity (average daily share volume, spread), and price level.
However, existing statistical and mathematical forecasting models suffer from the inability to perform comprehensive and accurate analyses of transaction costs because they fail to adapt to intraday fluctuations in market conditions and rely on the assumption of market equilibrium, i.e., market neutrality. Also, many forecasters rely on structured mathematical or econometric models that require changes to the specification or estimation techniques to adapt to changes in the statistical properties or behavior patterns in the market. Further, these models calculate strategies before an order execution is started and assume that one follows the strategy independent of any changes in the realized market conditions.
Traditional models do not adequately consider the prevailing market sentiments in assessing the transaction costs of certain trades. Therefore, there is a need in the field for a forecasting model that adequately considers real-time data and intraday fluctuations in market conditions, and is adaptive to user inputs.
In particular, there is a need to provide a model that recommends an optimal trading strategy based on both trader's input and real-time market conditions. The model should be capable of updating transaction cost estimates throughout the trade execution horizon. In order to meet these needs and to overcome deficiencies in the field, and to provide other non-obvious features and advantages, the present invention includes systems, methods and computer program products that forecast the transaction costs of a proposed trade based on user-selected constraints and real-time data. The invention can also provide an optimized trading strategy to satisfy user-defined constraints.